Barlow’s Research Roundup: Can capital markets continue driving bank profits?

TOP LINKS Barlow’s Research Roundup: Can capital markets continue driving bank profits? SCOTT BARLOW MARKET STRATEGIST PUBLISHED 10 MINUTES AGO COMMENTS SHARE SAVE FOR LATER Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow BANK EARNINGS AND CAPITAL MARKETS Capital markets activity has been the growth engine for the major banks, so Scotiabank analyst Mike Rizvanovic assessed his long this can continue, “The Capital Markets segment for the large Canadian banks, in aggregate, has beaten consensus expectations handily in each of the past seven quarters, by an average of 15 per cent, while the subsequent increase in consensus earnings for the segment in the following year post-quarter has risen by a much lower average of only 4 per cent. That persistent shortfall has created a favorable dynamic for the group, and played an important role in driving consistent EPS beats. Canadian banks’ management teams continue to provide a constructive outlook for the segment in the coming quarters, framing the recent strength as a structural step-up rather than a cyclical peak, pointing to robust client activity, healthy balance sheets among corporate clients, a strong pipeline of deal activity, and a continued push towards building a far more diversified business overall … Cap Markets downside potential least impactful for TD, NA most at risk: Based on earnings mix, NA is most exposed to the Capital Markets business, which accounted for 35 per cent of the bank’s consolidated earnings in the most recent 12-month period, while TD is least exposed at 14 per cent. We estimate that every 10-per-cent reduction in the segment’s earnings reduces our F2027 EPS estimates by an average of 2 per cent (ranges from 1.0 per cent for TD and 2.8 per cent for NA)” . VALUE IN PRECIOUS METALS RBC Capital Markets analyst Josh Wolfson looked for deals in the precious metals sector, “Equity valuations have expanded. At spot gold prices, our royalty coverage trades at 1.98 times P/NAV, compared to 1.72 times/1.79 times on a 1Y/3Y basis. Our senior producer coverage trades at 1.31 times P/NAV, compared to 1.13 times/1.12 times on a 1Y/3Y basis. At spot gold, senior producers are trading at forward 12-month FCF/EV yields of 6.3 per cent, while royalty companies are trading at a CF/P of 4.0 per cent. We calculate implied gold prices of $4,425/oz for senior producers and $4,450/oz for royalties based on mid-cycle valuations. Higher valuations may…